filings.toolsEdwards Lifesciences 10-Q 2024-03-31
Filed 2024-04-29. 8 sections, 174K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2024
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-15525
EDWARDS LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 36-4316614 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Edwards Way
Irvine, California 92614
(Address of principal executive offices and zip code)
(949) 250-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $1.00 per share | EW | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's common stock, $1.00 par value, as of April 25, 2024 was 602.6 million.
EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended March 31, 2024
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements contained in this report to be covered by the safe harbor provisions of such Acts. Statements other than statements of historical or current fact in this report or referred to or incorporated by reference into this report are "forward-looking statements" for purposes of these safe harbor provisions. These statements can sometimes be identified by the use of the forward-looking words such as "may," "believe," "will," "expect," "project," "estimate," "should," "anticipate," "plan," "goal," "continue," "seek," "pro forma," "forecast," "intend," "guidance," "optimistic," "aspire," "confident," other forms of these words or similar words or expressions or the negatives thereof. Statements regarding past performance, efforts, or results about which inferences or assumptions may be made can also be forward-looking statements and are not indicative of future performance or results; these statements can be identified by the use of words such as "preliminary," "initial," "potential," "possible," "diligence," "industry-leading," "compliant," "indications," or "early feedback" or other forms of these words or similar words or expressions or the negatives thereof. These forward-looking statements are subject to substantial risks and uncertainties that could cause our results or future business, financial condition, results of operations or performance to differ materially from our historical results or experiences or those expressed or implied in any forward-looking statements contained in this report. These risks and uncertainties include, but are not limited to: the spin-off of our critical care product group, our ability to develop new products and avoid manufacturing and quality issues; clinical trial or commercial results or new product approvals and therapy adoption; the impact of domestic and global conditions; competition in the markets in which we operate; our reliance on vendors, suppliers, and other third parties; damage, failure or interruption of our information technology systems; the impact of public health crises; consolidation in the healthcare industry; our ability to protect our intellectual property; our compliance with applicable regulations; our exposure to product liability claims; use of our products in unapproved circumstances; changes to reimbursement for our products; the impact of currency exchange rates; unanticipated actions by the United States Food and Drug Administration and other regulatory agencies; changes to tax laws; unexpected impacts or expenses of litigation or internal or government investigations; and other risks detailed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2023, as such risks and uncertainties may be amended, supplemented or superseded from time to time by our subsequent reports on Forms 10-Q and 8-K we file with the United States Securities and Exchange Commission. These forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections.
Unless otherwise indicated or otherwise required by the context, the terms "we," "our," "it," "its," "Company," "Edwards," and "Edwards Lifesciences" refer to Edwards Lifesciences Corporation and its subsidiaries.
Part I. Financial Information
Item 1. Financial Statements
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except par value; unaudited)
| March 31, 2024 | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 1,224.6 | $ | 1,144.0 | |||||||
| Short-term investments (Note 5) | 473.0 | 500.5 | |||||||||
| Accounts receivable, net of allowances of $13.5 and $8.3, respectively | 817.6 | 775.1 | |||||||||
| Other receivables | 59.3 | 61.8 | |||||||||
| Inventories (Note 2) | 1,207.3 | 1,168.2 | |||||||||
| Prepaid expenses | 138.1 | 146.8 | |||||||||
| Other current assets | 250.6 | 239.3 | |||||||||
| Total current assets | 4,170.5 | 4,035.7 | |||||||||
| Long-term investments (Note 5) | 455.6 | 583.9 | |||||||||
| Property, plant, and equipment, net | 1,767.9 | 1,749.4 | |||||||||
| Operating lease right-of-use assets | 98.4 | 94.0 | |||||||||
| Goodwill | 1,252.8 | 1,253.5 | |||||||||
| Other intangible assets, net | 446.8 | 428.4 | |||||||||
| Deferred income taxes | 776.7 | 754.6 | |||||||||
| Other assets (Note 2) | 767.6 | 463.7 | |||||||||
| Total assets | $ | 9,736.3 | $ | 9,363.2 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 212.3 | $ | 201.4 | |||||||
| Accrued and other liabilities (Note 2) | 873.7 | 969.1 | |||||||||
| Operating lease liabilities | 24.8 | 24.9 | |||||||||
| Total current liabilities | 1,110.8 | 1,195.4 | |||||||||
| Long-term debt | 597.2 | 597.0 | |||||||||
| Taxes payable | 79.6 | 80.6 | |||||||||
| Operating lease liabilities | 77.2 | 73.0 | |||||||||
| Uncertain tax positions | 336.6 | 339.3 | |||||||||
| Litigation settlement accrual | 82.0 | 94.2 | |||||||||
| Other liabilities | 266.5 | 264.3 | |||||||||
| Total liabilities | 2,549.9 | 2,643.8 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders' equity | |||||||||||
| Preferred stock, $0.01 par value, authorized 50.0 shares, no shares outstanding | — | — | |||||||||
| Common stock, $1.00 par value, 1,050.0 shares authorized, 651.8 and 650.5 shares issued, and 602.4 and 601.1 shares outstanding, respectively | 651.8 | 650.5 | |||||||||
| Additional paid-in capital | 2,379.8 | 2,274.4 | |||||||||
| Retained earnings | 9,344.3 | 8,992.4 | |||||||||
| Accumulated other comprehensive loss (Note 12) | (233.3) | (242.8) | |||||||||
| Treasury stock, at cost, 49.4 and 49.4 shares, respectively | (5,024.7) | (5,024.5) | |||||||||
| Total Edwards Lifesciences Corporation stockholders' equity | 7,117.9 | 6,650.0 | |||||||||
| Noncontrolling interest | 68.5 | 69.4 | |||||||||
| Total stockholders' equity | 7,186.4 | 6,719.4 | |||||||||
| Total liabilities and equity | $ | 9,736.3 | $ | 9,363.2 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in millions, except per share information; unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Net sales | $ | 1,598.2 | $ | 1,459.6 | |||||||||||||||||||
| Cost of sales | 385.6 | 329.5 | |||||||||||||||||||||
| Gross profit | 1,212.6 | 1,130.1 | |||||||||||||||||||||
| Selling, general, and administrative expenses | 489.7 | 436.3 | |||||||||||||||||||||
| Research and development expenses | 285.2 | 261.2 | |||||||||||||||||||||
| Intellectual property agreement and certain litigation expenses (Note 3) | 8.9 | 43.5 | |||||||||||||||||||||
| Change in fair value of contingent consideration liabilities (Note 7) | — | 0.7 | |||||||||||||||||||||
| Separation costs (Note 4) | 41.3 | — | |||||||||||||||||||||
| Operating income, net | 387.5 | 388.4 | |||||||||||||||||||||
| Interest income, net | (16.5) | (8.6) | |||||||||||||||||||||
| Other income, net | (5.4) | (1.6) | |||||||||||||||||||||
| Income before provision for income taxes | 409.4 | 398.6 | |||||||||||||||||||||
| Provision for income taxes | 58.4 | 58.1 | |||||||||||||||||||||
| Net income | 351.0 | 340.5 | |||||||||||||||||||||
| Net loss attributable to noncontrolling interest | (0.9) | — | |||||||||||||||||||||
| Net income attributable to Edwards Lifesciences Corporation | $ | 351.9 | $ | 340.5 | |||||||||||||||||||
| Share information (Note 13) | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.58 | $ | 0.56 | |||||||||||||||||||
| Diluted | $ | 0.58 | $ | 0.56 | |||||||||||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 601.6 | 607.5 | |||||||||||||||||||||
| Diluted | 604.1 | 610.9 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Net income | $ | 351.0 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. See “Note Regarding Forward-Looking Statements” preceding Part I, Item 1 in this Quarterly Report on Form 10-Q.
We are the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring. Driven by a passion to help patients, we partner with the world's leading clinicians and researchers and invest in research and development to transform care for those impacted by structural heart disease or who require hemodynamic monitoring during surgery or in intensive care. We conduct operations worldwide and are managed in the following geographical regions: United States, Europe, Japan, and Rest of World. Our products are categorized into the following groups: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. On December 7, 2023, we announced our intention to complete a tax-free spin-off of our Critical Care product group near the end of 2024. The planned separation will enable us to pursue expanded opportunities for TAVR, TMTT, and Surgical patients, as well as new investments in interventional heart failure technologies.
Financial Highlights
Our net sales for the first three months of 2024 were $1.6 billion, representing an increase of $138.6 million over the first three months of 2023, driven primarily by sales of our TAVR products.
Our gross profit increased in the three months ended March 31, 2024, driven by our sales growth. Gross profit as a percentage of sales decreased primarily due to foreign currency rate fluctuations. The increase in our diluted earnings per share in the three months ended March 31, 2024 was driven by our increased gross profit, partially offset by an after-tax charge of $36.8 million related to costs associated with the planned spin-off of our Critical Care product group. See Note 4 to the Consolidated Condensed Financial Statements for further information.
Healthcare Environment, Opportunities, and Challenges
The medical technology industry is highly competitive and continues to evolve. Our success is measured both by the development of innovative products and the value we bring to our stakeholders. We are committed to developing new technologies and providing innovative patient care, and we are committed to defending our intellectual property in support of those developments. Our vision for growth is to treat patients with both valvular and non-valvular structural heart disease, such as heart failure, which is a natural progression of the disease for many patients suffering from aortic stenosis and mitral and tricuspid regurgitation. In the first three months of 2024, we invested 17.8% of our net sales in research and development.
We are dedicated to generating robust clinical, economic, and quality-of-life evidence increasingly expected by patients, clinicians, and payors in the current healthcare environment, with the goal of encouraging the adoption of innovative new medical therapies that demonstrate superior outcomes.
New Accounting Standards
Information on new accounting standards is included in Note 1 to the Consolidated Condensed Financial Statements.
Results of Operations
Net Sales by Region
(dollars in millions)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Percent Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 940.7 | $ | 849.1 | $ | 91.6 | 10.8 | % | |||||||||||||||||||||||||||||||||||||||
| Europe | 367.8 | 331.1 | 36.7 | 11.1 | % | ||||||||||||||||||||||||||||||||||||||||||
| Japan | 110.8 | 114.1 | (3.3) | (2.8) | % | ||||||||||||||||||||||||||||||||||||||||||
| Rest of World | 178.9 | 165.3 | 13.6 | 8.2 | % | ||||||||||||||||||||||||||||||||||||||||||
| Outside of the United States | 657.5 | 610.5 | 47.0 | 7.7 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,598.2 | $ | 1,459.6 | $ | 138.6 | 9.5 | % |
Net sales outside of the United States include the impact of foreign currency exchange rate fluctuations. The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs, and our hedging activities.
Net Sales by Product Group
(dollars in millions)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Percent Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||||||||||||||
| Transcatheter Aortic Valve Replacement | $ | 1,007.9 | $ | 947.9 | $ | 60.0 | 6.3 | % | |||||||||||||||||||||||||||||||||||||||
| Transcatheter Mitral and Tricuspid Therapies | 72.9 | 41.6 | 31.3 | 75.2 | % | ||||||||||||||||||||||||||||||||||||||||||
| Surgical Structural Heart | 266.1 | 248.2 | 17.9 | 7.2 | % | ||||||||||||||||||||||||||||||||||||||||||
| Critical Care | 251.3 | 221.9 | 29.4 | 13.3 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,598.2 | $ | 1,459.6 | $ | 138.6 | 9.5 | % |
Transcatheter Aortic Valve Replacement Sales
Net sales of TAVR products increased for the three months ended March 31, 2024 driven by higher sales of the Edwards SAPIEN platform in 2024, primarily the Edwards SAPIEN 3 Ultra RESILIA valve in the United States and Japan, and the Edwards SAPIEN 3 Ultra valve in Europe.
In January 2024, we completed patient treatment in our PROGRESS pivotal trial, studying the treatment of moderate aortic stenosis patients, and we received CE Mark approval for the Edwards SAPIEN 3 Ultra RESILIA valve in Europe.
Transcatheter Mitral and Tricuspid Therapies Sales
Net sales of TMTT products increased for the three months ended March 31, 2024 primarily due to higher sales of our PASCAL system and our EVOQUE replacement system in the United States and Europe.
In mitral replacement, we completed enrollment in the ENCIRCLE pivotal trial for SAPIEN M3 and, in January 2024, we received FDA approval for a SAPIEN M3 continued access program*.* In February 2024, we received FDA approval for EVOQUE for the treatment of tricuspid regurgitation.
Surgical Structural Heart Sales
Net sales of Surgical products increased for the three months ended March 31, 2024 primarily due to higher sales of the INSPIRIS RESILIA aortic valve in the United States and Europe, the KONECT RESILIA tissue valved conduit in the United States, and the MITRIS RESILIA valve in the United States.
We are continuing to enroll patients in our MOMENTIS clinical study to demonstrate the durability of RESILIA tissue in the mitral position.
Critical Care Sales
Net sales of Critical Care products increased for the three months ended March 31, 2024 primarily due to:
- increased demand for our enhanced surgical recovery products and pressure monitoring products, primarily in the United States;
partially offset by:
- foreign currency exchange rate fluctuations, which decreased net sales outside of the United States by $2.3 million for the three months ended March 31, 2024, primarily due to the weakening of the Japanese yen against the United States dollar.
Gross Profit
The decrease in gross profit as a percentage of net sales for the three months ended March 31, 2024 was driven by a 1.6 percentage point negative impact from foreign currency rate fluctuations, primarily the weakening of the United States dollar against the Euro, partially offset by the weakening of the Japanese yen against the United States dollar.
Selling, General, and Administrative ("SG&A") Expenses
SG&A expenses increased for the three months ended March 31, 2024 primarily due to higher field-based personnel-related costs in support of our growth strategy initiatives, primarily in the United States and Europe. Foreign currency exchange rate fluctuations decreased expenses by $1.7 million for the three months ended March 31, 2024 primarily due to the weakening of the Japanese yen against the United States dollar.
Research and Development ("R&D") Expenses
R&D expenses increased for the three months ended March 31, 2024 primarily due to continued investments in our aortic transcatheter valve innovations, including increased clinical trial activity.
Intellectual Property Agreement and Certain Litigation Expenses
We incurred certain litigation expenses related to intellectual property litigation and tax litigation of $8.9 million and $6.5 million during the three months ended March 31, 2024 and 2023, respectively. On April 12, 2023, we entered into an Intellectual Property Agreement (the "Intellectual Property Agreement") with Medtronic, Inc. ("Medtronic") and recorded a $37.0 million charge in March 2023. For more information, see Note 3 to the Consolidated Condensed Financial Statements.
Separation Costs
On December 7, 2023, we announced our intention to complete a tax-free spin-off of our Critical Care product group as a separate publicly-traded company to Edwards Lifesciences' shareholders. We incurred separation costs of $41.3 million during the three months ended March 31, 2024, primarily related to consulting, legal, tax, and other professional advisory services associated with the planned spin-off.
For more information, see Note 4 to the Consolidated Condensed Financial Statements.
Provision for Income Taxes
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment with significant operations in various locations outside the United States which have statutory tax rates typically lower than the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
Our effective income tax rate was 14.3% and 14.6% for the three months ended March 31, 2024 and 2023, respectively. The decrease in the effective rate between the three months ended March 31, 2024 and 2023 was primarily due to an increased tax benefit from employee share-based compensation. In addition, the effective rates for the three months ended March 31, 2024 and 2023 were lower than the federal statutory rate of 21% primarily due to (1) foreign earnings taxed at lower rates, (2) Federal and California research and development credits, and (3) the tax benefit from employee share-based compensation.
In the normal course of business, the Internal Revenue Service ("IRS") and other taxing authorities are in different stages of examining various years of our tax filings. During these audits, we may receive proposed audit adjustments that could be material. An adverse outcome in these audits could have a material effect on our results of operations and financial condition. We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe are more likely than not to require settlement, the eventual outcome with a tax authority may result in a tax liability that is materially different from that reflected in the consolidated
financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. We believe that adequate amounts of tax and related penalty and interest have been provided for any adjustments that may result from these uncertain tax positions.
We executed an Advance Pricing Agreement ("APA") in 2018 between the United States and Switzerland governments for tax years 2009 through 2020 covering various, but not all, transfer pricing matters. The unagreed transfer pricing matters, namely Surgical Structural Heart and Transcatheter Aortic Valve Replacement (collectively "Surgical/TAVR") intercompany royalty transactions, then reverted to IRS Examination for further consideration as part of the respective years' regular tax audits. In addition, we executed other bilateral APAs as follows: during 2017, an APA between the United States and Japan covering tax years 2015 through 2019; and during 2018, APAs between Singapore and Japan and between Switzerland and Japan covering tax years 2015 through 2019. We have filed to renew all three of the APAs with Japan for the years 2020 and forward. An APA between Switzerland and Japan covering tax years 2020 through 2024 was executed in 2021. An APA between the United States and Japan covering tax years 2020 through 2024 was executed in 2023. The execution of some or all these APA renewals depends on many variables outside of our control.
The audits of our United States federal income tax returns through 2014 have been closed. The IRS audit field work for the 2015 through 2017 tax years was completed during the second quarter of 2021, except for certain transfer pricing and related matters. The IRS is currently examining the 2018 through 2020 tax years.
The audits of our material state, local, and foreign income tax matters have been concluded for years through 2015. While not material, we continue to address matters in India for years since 2010.
During 2021, we received a Notice of Proposed Adjustment (“NOPA”) from the IRS for the 2015 through 2017 tax years relating to transfer pricing involving Surgical/TAVR intercompany royalty transactions between our United States and Switzerland subsidiaries. The NOPA proposed a substantial increase to our United States taxable income, which could result in additional tax expense for this period of approximately $230 million and represented a departure from a transfer pricing method we had previously agreed upon with the IRS. We have disagreed with the NOPA and pursued an administrative appeal with the IRS Independent Office of Appeals ("Appeals"). The Appeals process culminated in the third quarter of 2023 when we and Appeals concluded that a satisfactory resolution of the matter at the administrative level was not possible.
During the fourth quarter of 2023, Appeals issued a notice of deficiency ("NOD") increasing our 2015 through 2017 United States federal income tax in amounts resulting from the income adjustments previously reflected in the NOPA. The additional tax sought in excess of our filing position is $269.3 million before consideration of interest and a repatriation tax
offset.
We plan to vigorously contest the additional tax claimed by the IRS through the judicial process. Final resolution of this
matter is not likely within the next 12 months. We believe the amounts previously accrued related to this uncertain tax position
are appropriate for a number of reasons, including the interpretation and application of relevant tax law and accounting
standards to our facts and, accordingly, have not accrued any additional amount based on the NOD and other proceedings to
date. Nonetheless, the outcome of the judicial process cannot be predicted with certainty, and it is possible that the outcome of
that process could have a material impact on our consolidated financial statements. As noted below, similar material tax
disputes may arise for the 2018 through 2023 tax years. While no payment of any amount related to the NOPA or NOD has yet
been required, we made a partial deposit with the IRS of $75 million in November 2022 to prevent the further accrual of interest on that portion of any additional tax we may ultimately be found to owe. In March 2024, we made an additional deposit with the IRS of $305 million to further mitigate interest on potential tax liabilities while we prepare to contest through the judicial process the IRS's entitlement to any of the additional tax claimed by the IRS.
Surgical/TAVR intercompany royalty transactions covering tax years 2018 through 2023 remain subject to IRS examination, and those transactions and related tax positions remain uncertain as of March 31, 2024. We have considered this information, as well as information regarding the NOD and other proceedings described above, in our evaluation of our uncertain tax positions. The impact of these unresolved transfer pricing matters, net of any correlative tax adjustments, may be significant to our consolidated financial statements. Based on the information currently available and numerous possible outcomes, we cannot reasonably estimate what, if any, changes in our existing uncertain tax positions may occur in the next 12 months and, therefore, have continued to record the uncertain tax positions as a long-term liability.
During the first quarter of 2024, we received a notice of assessment from the Israel Tax Authority (“ITA”) wherein the ITA claimed that we owe approximately $110 million of tax excluding interest and penalties in connection with a claimed 2017 transfer of intellectual property. We maintain that we did not transfer intellectual property outside of Israel and intend to vigorously defend that position through administrative and, if necessary, judicial proceedings. There can be no assurance that this matter will be resolved in our favor and an adverse outcome could have a material effect on our consolidated financial statements.
Additionally, many countries are implementing some or all the Organization for Economic Co-operation and Development's Base Erosion and Profit Shifting Pillar Two rules ("Pillar Two") that impose a global minimum tax of 15%. Under Pillar Two, a company is required to determine a combined effective tax rate for all entities located in a jurisdiction. If the jurisdictional effective tax rate is less than 15%, a top-up tax will be due to bring the jurisdictional effective tax rate up to 15%. We are continuing to monitor the implementation of Pillar Two by individual countries and the potential effects of Pillar Two on our effective tax rate. We do not expect Pillar Two to have a material impact on our consolidated financial statements in 2024. The provisions effective in 2025 may have a material impact on our consolidated financial statements in 2025 and future years, depending on future legislation, regulatory guidance, and business events.
Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, cash from operations, and amounts available under credit facilities. We believe that these sources are sufficient to fund the current and long-term requirements of working capital, capital expenditures, and other financial commitments. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions.
As of March 31, 2024, cash and cash equivalents and short-term investments held in the United States and outside of the United States were $851.4 million and $846.2 million, respectively.
We have a Five-year Credit Agreement (the "Credit Agreement") which provides for a $750.0 million multi-currency unsecured revolving credit facility and matures on July 15, 2027. We may increase the amount available under the Credit Agreement by up to an additional $250.0 million in the aggregate and extend the maturity date for an additional year, subject to agreement of the lenders. As of March 31, 2024, no amounts were outstanding under the Credit Agreement.
In June 2018, we issued $600.0 million of 4.3% fixed-rate unsecured senior notes (the "2018 Notes") due June 15, 2028. We may redeem the 2018 Notes, in whole or in part, at any time and from time to time at specified redemption prices. As of March 31, 2024, we have not elected to redeem any of the 2018 Notes. As of March 31, 2024, the carrying value of the 2018 Notes was $597.2 million.
From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. We consider several factors in determining when to execute share repurchases, including, among other things, expected dilution from stock plans, cash capacity, and the market price of our common stock. During the three months ended March 31, 2024, we did not purchase any of our common stock under the Board authorized repurchase program and, as of March 31, 2024, we had remaining authority to purchase $1.0 billion of our common stock under the share repurchase program.
On April 12, 2023, we entered into the Intellectual Property Agreement with Medtronic pursuant to which the parties agreed to a 15-year global covenant not to sue ("CNS") for infringement of certain patents in the structural heart space owned or controlled by each other. In consideration for the global CNS, we paid Medtronic a one-time, lump sum payment of $300.0 million and are paying annual royalties that are tied to net sales of certain Edwards products. For more information, see Note 3 to the Consolidated Condensed Financial Statements.
We have purchased options to acquire and have agreed to provide promissory notes to various entities. These arrangements could result in additional cash outlays in the future should we decide to exercise the options or should the entities
draw on the promissory notes.
At March 31, 2024, there had been no material changes in our cash requirements from known contractual and other obligations, including commitments for capital expenditures, as disclosed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2023.
Consolidated Cash Flows - For the three months ended March 31, 2024 and 2023:
Net cash flows used in operating activities of $53.5 million for the three months ended March 31, 2024 decreased $367.6 million over the same period last year primarily due to a $305.1 million tax deposit we made in 2024 to mitigate interest on potential tax liabilities we are contesting through the judicial process (see Note 14 to the Consolidated Condensed Financial Statements).
Net cash provided by investing activities of $63.1 million for the three months ended March 31, 2024 consisted primarily of net proceeds from investments of $161.4 million, partially offset by capital expenditures of $65.3 million.
Net cash provided by investing activities of $0.5 million for the three months ended March 31, 2023 consisted primarily of net proceeds from investments of $246.2 million, partially offset by a payment of $141.2 million to acquire a majority interest in another company and capital expenditures of $61.5 million
Net cash provided by financing activities of $61.7 million for the three months ended March 31, 2024 consisted primarily of proceeds from stock plans of $62.1 million.
Net cash used in financing activities of $206.6 million for the three months ended March 31, 2023 consisted primarily of purchases of treasury stock of $249.3 million, partially offset by proceeds from stock plans of $41.9 million.
Critical Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated condensed financial statements and sales and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 38-40 in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes from the information discussed therein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk, Foreign Currency Risk, Credit Risk, and Concentrations of Risk
For a complete discussion of our exposure to interest rate risk, foreign currency risk, credit risk, and concentrations of risk, refer to Item 7A Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes from the information discussed therein.
Investment Risk
We are exposed to investment risks related to changes in the underlying financial condition and credit capacity of certain of our investments. As of March 31, 2024, we had $805.8 million of investments in debt securities, of which $332.8 million were long-term. In addition, we had $122.8 million of investments in equity instruments of public and private companies. Should these companies experience a decline in financial performance, financial condition or credit capacity, or fail to meet certain development milestones, a decline in the investments' value may occur, resulting in unrealized or realized losses. See Note 5 to the Consolidated Condensed Financial Statements for additional information.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2024. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of March 31, 2024 that our disclosure controls and procedures are designed at a reasonable assurance level and effective in providing reasonable assurance that the information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
Please see Part I, Item 1, Note 11 of the “Consolidated Condensed Financial Statements” of this Quarterly Report on Form 10-Q for a description of our legal proceedings, which is incorporated by reference herein.
Item 1A. Risk Factors
A description of the risk factors associated with our business is contained in the Risk Factors section of our Annual Report on Form 10-K for our fiscal year ended December 31, 2023. There have been no material changes to our risk factors as previously reported.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In July 2022, the Board of Directors approved a stock repurchase program providing for up to $1.5 billion of repurchases of our common stock, effective July 28, 2022. In December 2023, the Board of Directors approved an additional $1.0 billion of repurchases under this program. Repurchases under the program may be made on the open market, including pursuant to a Rule 10b5-1 plan, and in privately negotiated transactions. The repurchase program does not have an expiration date. We did not purchase any of our common stock during the first quarter of 2024 and, as of March 31, 2024, we had remaining authority to purchase $1,048.5 million of common stock.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the first quarter of 2024, the following executive officers and directors entered into a 10b5-1 trading plan (each, a "Plan") intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act:
On February 12, 2024, Michael A. Mussallem, Chairman and Director, entered into a Plan providing for the potential sale of 276,900 shares of the Company’s stock commencing June 11, 2024. Mr. Mussallem's Plan terminates on the earlier of May 1, 2025 or the date all shares are sold.
On February 15, 2024, Scott B. Ullem, Corporate Vice President, Chief Financial Officer, entered into a Plan providing for the potential sale of 67,500 shares of the Company’s stock commencing May 21, 2024. Mr. Ullem's Plan terminates on the earlier of May 9, 2025 or the date all shares are sold.
On February 29, 2024, Bernard J. Zovighian, Chief Executive Officer and Director, entered into a Plan providing for the potential sale of 25,147 shares of the Company’s stock commencing May 30, 2024. Mr. Zovighian's Plan terminates on the earlier of December 18, 2024 or the date all shares are sold.
Item 6. Exhibits
The exhibits listed in the Exhibit Index below are filed, furnished, or incorporated by reference as part of this report on Form 10-Q.
- Represents management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EDWARDS LIFESCIENCES CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| Date: | April 29, 2024 | By: | /s/ SCOTT B. ULLEM | ||||||||
| Scott B. Ullem Chief Financial Officer (Principal Financial Officer; Duly Authorized Officer) | |||||||||||
| Date: | April 29, 2024 | By: | /s/ ROBERT W.A. SELLERS | ||||||||
| Robert W.A. Sellers Corporate Controller (Principal Accounting Officer) |